Jeffrey Sachs speaks the truth!

Here's a video (you'll have to click on the word 'Here' to watch the video on YouTube, as BloombergTV has disabled embedding) from a couple of days ago of (one of my all time favorite economists) Jeffrey Sachs being interviewed on Bloomberg Television. He really hammers home the point that (many others have also made) that before we can start seeing any real progress in this country, we're going to need to go to the public financing of campaigns. Well, he didn't exactly use those words, but the case he laid out and the evidence he presented clearly support that position. I was also amused by the way he handled the question about the Laffer Curve: he answered it the way any good biologist would answer a similar question about Intelligent Design.

Sachs says that Geithner plan is just a giveaway.

Jeffrey Sachs today wrote an opinion piece which thoroughly trashed the Geithner plan. Despite its stated intentions, the Geithner plan, according to Sachs, will allow institutions to unload all of their worthless (market price = $0) toxic assets at full price (full price = "more fictitious than Harry Potter") courtesy of the US taxpayer. In other words, the "rescue plan" amounts to nothing more than a direct transfer of funds from the American taxpayer to the banks that caused the mess we're in. Dr. Sachs demonstrates this using a hypothetical example involving Citibank and $1M in worthless toxic--er, legacy--assets.

Here's how. Consider a toxic asset held by Citibank with a face value of $1 million, but with zero probability of any payout and therefore with a zero market value. An outside bidder would not pay anything for such an asset. All of the previous articles consider the case of true outside bidders.

Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan. The CPPIF will bid the full face value of $1 million for the worthless asset, because it can borrow $850K from the FDIC, and get $75K from the Treasury, to make the purchase! Citibank will only have to put in $75K of the total.

Citibank thereby receives $1 million for the worthless asset, while the CPPIF ends up with an utterly worthless asset against $850K in debt to the FDIC. The CPPIF therefore quietly declares bankruptcy, while Citibank walks away with a cool $1 million. Citibank's net profit on the transaction is $925K (remember that the bank invested $75K in the CPPIF) and the taxpayers lose $925K. Since the total of toxic assets in the banking system exceeds $1 trillion, and perhaps reaches $2-3 trillion, the amount of potential rip-off in the Geithner-Summers plan is unconscionably large.

I'm not sure whether I'm more consumed with anger or despair over this. If Sachs is right about this, that plan cannot be allowed to go forward. And it's not like there isn't a better (or at least radically different) plan out there. Sachs brings that up too in his piece.

Obama: Please start listening to Sachs, Krugman, Stiglitz, etal!

(via Paul Krugman)

Preach It Sister!

(totally stolen from Greg Laden)

Centrism is a pose rather than a philosophy.

The title of this post comes from Paul Krugman today.

Atrios is right, though I’d put it a bit differently: centrism is a pose rather than a philosophy. And to support that pose, the centrists are demanding $100 billion in cuts in the economic stimulus plan — not because they have any coherent argument saying that the plan is $100 billion too big, not because they can identify $100 billion of stuff that should not be done, but in order to be able to say that they forced Obama to move to the center.

Which raises the obvious question: shouldn’t Obama have made a much bigger plan, say $1.3 trillion, his opening gambit? If he had, he could have conceded to the centrists by cutting it to $1.2 trillion, and still have had a plan with a good chance of really controlling this slump. Instead he made preemptive concessions, only to find the centrists demanding another pound of flesh as proof of their centrist power.

This is exactly right. A political centrist's ideal stimulus package isn't objective in the sense before introduction of the bill, there is no $ amount attached to it. The Republicans are certainly objective--they're looking for a stimulus package with $0 spending. The Obama administration's bill is (or should be) objective--the stimulus package should be large enough to prevent a major economic melt down. But the centrist's stimulus package is subjective in the sense that the $ amount that it should be is subject to the president's proposed number--it needs to be somewhat less so that the centrist can claim to be reasonable. But the actual number is undetermined until Obama fires first.

The Obama administration has received an F on their first quiz in Negotiations 101. Let's hope that they're fast learners.

Paul Krugman Nobel lecture

Yesterday, economist and columnist Paul Krugman accepted the 2008 Nobel Prize in economics. To watch his lecture on new theories about International trade, click on the above picture.

Unemployment

As I write this post, I am entering my second month of unemployment. I had been at my last job for 10 years when I was unceremoniously let go. Of course I was not alone last month; I was one of 533,000 who have joined the now 10.3 million unemployed. The picture looks quite dismal.



The horrible thing is that the unemployment picture is actually much worse that the above picture would lead you to believe. You see, unemployment figures only measure the number of people who file unemployment claims with the government. A more sobering metric is percent employment: in other words, # people employed/population. Granted, this includes (as far as I know) children and retirees, but it also includes the multitudes who no longer qualify for unemployment benefits, or never qualified because they were employed part time, or have just given up looking for work. I know people in those categories.

Below is a chart (which I shamelessly stole from Paul Krugman) showing the trend of percent employment over the last 10 years.



What I'm seeing above is an honest representation of what the Bush XLIII presidency has done to the American worker. Bush has been a complete failure and his riddance is beyond good. But I'm not a veritable pessimist and I do have a great deal of hope for the future.